The Camp Tax Reform Plan Is a Good Start With a Few Caveats

Rep. Dave Camp (R-MI) unveiled a plan today (executive summary here) to simplify the tax code and reduce income tax rates, from the current seven rates to just two rates:  10 percent and 25 percent.   It also groups personal family exemptions into three categories instead of the usual six:  a larger standard deduction, a larger child tax credit, and an additional deduction for single parents.  There are an array of other tweaks to existing deductions and credits (such as the EITC), to make them more simple and easy to understand.

Having just browsed the summary and all 182 pages of the discussion draft, my first reaction is Hooray!  Any effort to reduce the compliance costs and time involved in filing taxes is commendable.  Indeed many individuals who qualify for certain credits or deductions because they are simply unaware that they qualify for them.  While paying accountants to prepare tax forms keeps them employed, it takes money out of other people’s pockets.  So attempting to make the process more “postcard friendly” is a step in the right direction.

There are some other goodies as well.  The Camp plan would restore the R&D tax credit, making it permanent, lower the corporate income tax rate for 25 percent, and permanently repeal the troublesome Alternative Minimum Tax that surprisingly hits middle-income families.  (I might add, however, that the NCPA’s 9 percent corporate tax plan is worth looking into).

Also, the current capital gains tax structure would be repealed.  The bill states,

“The modified tax preference for long-term capital gains and dividends would result in such income being taxed at 60 percent of the taxpayer’s marginal rate. Thus, for example, taxpayers in the 35-percent bracket would pay an effective rate of 21 percent on adjusted net capital gain. Combining this with the additional 3.8 percent tax imposed on such income by Code section 1411 yields a top effective rate of 24.8 percent, slightly lower than the top effective rate under current law, which is 25 percent.”

At least the bill tempers the obsession with taxing investments.

The caveat:  I raise my eyebrows at the 10 percent “surtax” in this plan on certain types of unearned income for singles earning $400,000 a year (couples earning $450,000 a year).  Press reports mentioned the surtax, but the word is nowhere to be found in the draft.  But hey, let’s call it what it is.  It would essentially replace the current 39.6 percent tax bracket by adding 10 percentage points to the 25 percent that households pay.  If I recall, many on the right, including members of Congress, decried the Obamacare 3.8 percent “surtax” that is the law of the land now for unearned income over $200,000 a year.   The estimate that it the Obamacare tax would produce $317 billion in additional revenue over 10 years is probably unrealistic, particularly since a cursory search on the Internet produces a slew of articles on how to avoid the tax.  So why is a surtax coming from the other side any different?

If this plan picks up steam, expect a few more blog posts on its many aspects.

 

 

Comments (16)

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  1. Brian Williams. says:

    Excellent as always, Pam. Camp’s office say they are taking the long view. This is the first step. Maybe it evolves into a tax plan Congress can pass and a future president can sign 2 or 3 years from now. That’s how they did it in the 1980s: The 1986 tax reform law was introduced as legislation in 1984.

  2. Scott P says:

    Having a new tax system will make everything better. Simplify life for many individuals that have a hard time filing them. The easier it is to file taxes, more people will file them. This will increase revenue to the government and perhaps is a small step towards balancing the deficit. Let’s hope this proposal is taken seriously, as it can benefit us all.

  3. Martina F says:

    I don’t think that this reform will happen. The more complicated the tax system is, less people will understand it. Therefore, less people will complain about the taxes they pay. Having a complicated tax code, which constantly change and several hundreds of pages long, is a government tactic to maintain people ignorant about what they pay.

  4. Franz O says:

    Well this is only the draft. If Congress takes this proposal seriously and give it the proper debate, expect to get it much complicated. The current tax code includes loopholes and pork that congressmen and congresswomen support. They have interest hidden in the tax code to either benefit them personally or their constituents. Being simple in the draft doesn’t mean that it will be simple when approved. Expect this tax bill to change significantly from now to when it is approved (if we ever get there).

    • Blake G says:

      That would be an interesting analysis. Highlight the difference between the first draft and the approved version. The differences will signal who is fighting for their interests and what they are. This would expose those members of Congress who legislate on their own interests, rather than the interest of their constituents or the country. If this analysis is performed, the way politics is handled in this country will improve, and Congress will be purged (hopefully) of those members with hidden interests.

  5. Hunter D says:

    The government needs more revenue to be sustainable in the long run. I hope members of Congress keep this in mind when debating this bill. The only way the government can decrease its deficit is by thinking in the long run, an issue as big as this one will not be solved in the short run or with short run measures. Members of Congress: leave your short term interests aside, find solutions for the long run. That is when the country will have real gains and you will leave a lasting legacy.

  6. Walter S says:

    Where will this reform leave us in the Laffer Curve compared to the current tax system? Will government’s revenue increase or it is primary a simplifying effort? We need reforms that deliver.

  7. Simon C says:

    A necessity to improve our tax system should force the two parties to work together. The solution to balance the budget must come from a bipartisan agreement to be viable. I hope this is a step towards the right direction.

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